Apple misfires with not-so-cheap iPhone 5C

Commentary: Ignoring low-end markets could be costly later on

A journalist uses her iPhone 5 to take a photo of a new yellow iPhone 5C at Apple Inc's announcement event in Beijing.

SAN FRANCISCO (MarketWatch) — While certainly no stranger to high expectations, Apple Inc. made a rare misfire with the launch of its so-called cheaper iPhone — one that may impact the stock for months, even beyond the beating it took on Wednesday.

Apple still has many fans on the Street, and many found ways to put a positive spin on Tuesday’s much-hyped iPhone rollout. One common argument is that the company has shown that it will not sacrifice its all-important profit margins — among the highest in the business — in an effort to grab more market share.

Cheap smartphones an alternative to Apple, Samsung

(2:58)

The WSJ’s Yun-Hee Kim shows three smartphones that don’t sport an Apple or Samsung logo.

But time may force Apple to change its tune. Ignoring the lower end of the smartphone market effectively shuts Apple out of the segment with the most growth potential. Customers who buy into one smartphone technology at a low price are more likely to stay with that system as they upgrade, which gives smartphones based on the Android
GOOG, -1.10%
operating system a big advantage as the most widely available at entry price levels.

Or, as Scott Craig at Bank of America/Merrill Lynch wrote in Wednesday’s downgrade, Apple’s prices were “too high to increase penetration in emerging markets.”

Apple also needs to restore some of its lost luster in smartphones to stave off slowing iPhone sales. Unit volumes of iPhone sales have declined on a sequential basis in the last two quarters. In the June quarter, Apple sold 31.2 million iPhones, down from 37.4 million in the March quarter and 47.8 million in the December quarter.

“While investors have debated about myriad new incremental revenue sources for Apple, including a watch, television, e-commerce/payments, among others, we believe that two $10 billion to $50 billion incremental revenue opportunities exist for Apple — a lower priced iPhone, and a converged PC/tablet device,” Bernstein Reseach analyst Toni Sacconaghi, told clients on Monday ahead of the iPhone launch.

Cheaper iPhone still not a bargain in China

(5:23)

Apple held its first new product launch in China in Beijing, introducing consumers to two new iPhones. A cheaper model was thought to be aimed at developing markets, but will middle-income consumers in China spend more than $700 on a new phone?

Investors had been all over the map guessing what the low-end pricing scheme would be, ranging from as low as $300 to as high as $500. Sacconaghi expected the company’s low-price iPhone 5C to come in around $400 “which is meaningfully more expensive than we thought a “low price” iPhone would be at the beginning of the year (about $300),” he wrote.

No one thought it would cost as much as $700, or about $733, to be exact, in one of the biggest markets of all, China.

An example of the change in tone among investors was evident after the news. “We worry that Apple’s inability/unwillingness to come out with a low priced offering for emerging markets nearly ensures that the company will continue to be an overall share loser in the smartphone market until it chooses to address the low end,” Sacconaghi wrote on Wednesday.

Apple clearly wants to remain a high-end player, and by doing so it will risk becoming a niche player.

“Apple will continue to lose users to the Android ecosystem,” said Kulbinder Garcha, an analyst with Credit Suisse, in a note to clients. “On our new estimates, Apple’s smartphone share will decline to 15.5%/13.1% this year and next from 18.1% last year.”

With this pricing, Apple will keep its profit margins at a level that Wall Street expects, but it may do so at the cost of losing a lot of potential volume sales.

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